irs home business deductions
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Four Common Tax Myths All Home Business Owners should be aware of
The home office deduction get a bad wrap. There are so many rumors out on home office deductions, you may want to avoid the whole subject. But if you have a home office and do not deduct it, you could miss some very valuable tax savings. Let's take a look at the truth behind the myths about the home office deduction.
Myth number one – home office deduction is a red flag for an audit.
Twenty years ago, this could have been true simply because it was unusual. Now home business seems to be almost as popular as occupiers! Millions of individuals who operate some form of economic activity out of their homes. Other telecommute, and deduct their home office expense as an itemized deduction. The home office deduction is no longer an automatic flag for an audit.
The key to avoiding an audit is reasonable. IRS uses computer analysis of all tax returns. Some reductions too much of your income and benchmarks for your industry may be in doubt.
Bottom line: Prefer a part of your home expenses as a cost to operate your home-based activity expected!
Myth Number 2 – If I take a home office deduction, can I deduct all the costs of my home.
You deduct a portion of your home expenses as home office expense based on square footage of your home office space. If you have a 2,000 square foot home and a 200 square foot office, you can deduct 10% of your home expenses.
Unless you operate a nursery, your home office space must be used exclusively for business. Your kitchen will not be considered as home offices, just because you use the table to complete paperwork. If you use space for personal and business would not be covered.
The easiest way to keep track of this is to designate a room or rooms for home office purposes. If you do not have a whole room to use as office space, use furniture to separate the personal Part of the business space.
Of course there is one exception to this rule. If your business is wholesale and retail trade, and you have no other fixed location, you can include all the space you use for storage of inventory or product samples as part of your home office. This place is not necessary to be used exclusively, but must be used regularly, and suitable for storage.
Bottom line: Calculate the square footage you use exclusively for business and the square footage of your storage space for inventory to determine your home office deduction.
Myth number three – I can only take home office deductions if I work at home exclusively.
Old rule! Congress extended home office deduction to allow business owners with no other fixed place of business to take a home office deduction regardless of the number of hours they spend at home. If you provide services to customers or clients at their location, you can still qualify for home office deductions. You just need your home office for administration and management tasks.
Bottom line: You can drag your home office as long as you do not pay for other office space to run your business.
Myth No. 4 – home office deduction will make me lose my tax exclusion on the sale of my home.
The rules have changed here too. If you use 10% of your home for business purposes you no longer have to recognize 10% of the gain from the sale, which could have been possible if you meet the requirements for the sale of your residence.
What You Need to do, but include any depreciation deductions you took in the past year as a taxable capital gain. You still benefit because your capital gain rate is probably lower than your ordinary income tax rate. You are able to take the initial depreciation deductions at ordinary income tax, and bring it back into income when you sell your home at the lower capital gains rate. Your depreciation deduction can also reduce your self-taxation.
Bottom line: You can still save taxes overall by taking home office depreciation deductions each year.
Operating your business from home is a very smart move financially for the new or small business owner. You can save yourself thousands of dollars in rent to drive home instead of renting commercial space.
But the cost of housing your business is an expense and should be treated that way. You would not hesitate to deduct rent expenses for your business. Treat your home business expense in the same way. The tax money you save can be used to develop your business, or even to fund your family vacation! Talk to your tax preparer if you have more questions, and get ready to take this office home deduction on your next tax return!
About the Author
Todd Jensen, “The Profit Engineer”, has helped hundreds of business owners make their business more successful and profitable. For tips and strategies on how to boost your business success as well as increase your profits, visit
http://www.theprofitengineer.com or
http://www.freebusinessstartupinfo.com
Tax Deductions | The Best Kept Secrets Of The IRS
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